Banking stocks were badly hit once again in trade today with shares of private sector and public sector banks falling sharply as a falling rupee raised bond yields.

Shares in HDFC Bank dropped more then 4 per cent, while IndusInd Bank and Yes Bank were also down 4 per cent each. Joining the private sector banks were those from the PSU banking space with Syndicate Bank, Bank of Baroda and Canara Bank down more then 3 per cent each.

A falling rupee has led to bond yields hardening, which has put pressure on bond prices. When bond yields rise bond prices fall affecting banks. The benchmark 10-year government bond yield had surged to record levels of 9.48 percent a few days ago, but have cooled to 8.38 since then.

Banking stocks have been falling ever since the RBI announced measures to drain liquidity from the system to help battle the falling rupee.

It maybe recalled that the Marginal Standing Facility (MSF) rate for banks was hiked last month by 300 basis points above the policy repo rate under the Liquidity Adjustment Facility (LAF). Consequently, the MSF rate is now 10.25 per cent. This led to shar decline in banking stocks, particularly stocks of banks that depend on wholesale funding.

The overall allocation of funds under the LAF was restricted to 1 per cent of the Net Demand and Time Liabilities